Keep rental property or explore a short sale?

[cbr600rr]

Hi - I can use some advice on this one:

Back in December, we decided to move to a better area and get a bigger house since we outgrew our last house. We had taken out a second mortgage on the previous home for a remodel a few years back, and with the house underwater even if you only considered the first mortgage, selling was not a viable option.

So I rented it out to some very good tenants. They pay early or on time every month and never give me any problems.

Here are the numbers:

Mortgage 1: $114,000 balance, ARM 2.75% (just adjusted, was at 5.875% for the first 5 years). Payment went down from $600 a month to $263, putting this investment back in positive cash flow territory, but who knows for how long...

Mortgage 2: $28,000 balance, 15 year fixed 8.6%. Payment is $357.

Annual property taxes and insurance (not included in mortgage) ~ $3500

So, for the last few months I have been paying around $1,000 a month on the second mortgage to try and pay it off in a couple of years. However, I can't help but feel like I'm throwing money away since properties around it keep foreclosing and the value of the house has gone from $160K to around $80K.

This real estate agent I'm talking to is recommending a short sale and he says he can get it approved by the banks. Now, I know his motive is to sell the property and not look after my best interest, but I'm torn.

I have 800+ credit score. While I don't see myself needing a loan for anything anytime soon, I'm skeptical of the short sale process. I know people keep saying it's a business decision, just like any other bad asset: if you decide to cut your losses, you should be able to do so...

Am I better off doing a short sale and applying that $1000/month to my car loan or student loan? (I already save around 15% of my income)

Anyhow -- I'm curious about your opinions!

Thanks!

[littleroc02us]

Personally I think your going to have a problem doing a shortsale since you can make the payments and you have the money. From what I know why would the bank do that if you can pay.

[littleroc02us]

Plus, when did it become ok for people to default on their promises when they signed the paper. What is happening in this country?

[cbr600rr]

the real estate guy says he can show that when all things are considered, having that houses makes for a negative cash flow which is all that's needed to get them to approve a short sale. They'd rather settle for some amount rather than having it go into foreclosure. Regarding your other point, why is it OK for the bank to refuse to allow me to refinance that second mortgage with the high rate simply because the housing values nationally have plummeted? Is it morally acceptable for the bank to do what's in their best interest business-wise, but not me? Anyway, I'm still conflicted on this and not sure what to do.

[littleroc02us]

I took an 80/20 back in 2006 and tried to refinance with some of the Obama housing plan ideas and it hasn't worked with either of the banks because they won't subordinate the second loan. But I signed the papers and am going to pay off the second loan as fast as I can, because that is my responsibility. The housing market will come back and I will build equity over time. In your case you do what you feel is right.

[cbr600rr]

I'd planned to do that as well.. but with the house being in close proximity to Detroit, and I don't see that housing market rebounding in the next 10 years, I'm having some serious second thoughts.

[DayByDay]

We had taken out a second mortgage on the previous home for a remodel a few years back


So, for the last few months I have been paying around $1,000 a month on the second mortgage to try and pay it off in a couple of years. However, I can't help but feel like I'm throwing money away

You are paying for the remodel you wanted and received. I don't get why you think you shouldn't pay for it. You knew the price and agreed to it.

[TheStreetCeo]

Why do you have to do anything? it seems like you have a temporary problem. If you are getting enough rent each month from your tenants to satisfy the mortgage and taxes then just keep doing that. This housing crisis is temporary, it will rebound at some point and level out. Put your extra money towards your car loan and pay that off, keep the house as long as your tenants are paying, and keep pushing forward. don't ruin your credit for no reason.

[cbr600rr]

Why do you have to do anything? it seems like you have a temporary problem. If you are getting enough rent each month from your tenants to satisfy the mortgage and taxes then just keep doing that. This housing crisis is temporary, it will rebound at some point and level out. Put your extra money towards your car loan and pay that off, keep the house as long as your tenants are paying, and keep pushing forward. don't ruin your credit for no reason.

thanks, and that's what I'm leaning towards... BUT, what if interest rates skyrocket in the next year or two and then I'm stuck with an underwater property that I can't refi and with, say an 8-10% APR?